posted on 27 August 2016
from the Atlanta Fed
-- this post authored by Giulia Zilio
Financial markets around the globe reacted strongly in August 2015, when China started showing signs of economic slowdown. Financial markets weakened again in January 2016, when Chinese stocks fell dramatically after further devaluation of the yuan. Additionally, abundant supplies of oil and persistent concerns about China's weak economic growth have had a negative effect on already sluggish oil prices and have raised global worries for future demand of oil.
Indeed, the uncertainty seen in the financial markets since the beginning of the year partially reflects investors' concerns about China's economic performance and the extent of its financial and economic integration with the United States. In its January 27 statement, the Federal Open Market Committee, the policymaking body of the Federal Reserve, stated that it is "...closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook."
So how tied up in China's economic performance is the performance of the U.S. economy and, indeed, the performance of economies around the world? This three-part series will shed some light on the trade dynamics between China and the rest of the world. Part 1 looks at this issue from two different perspectives: direct (imports/exports) and indirect (imports/exports of U.S. major trading partners with China) trade exposure of the United States to China. Part 2 provides a broader view of the Chinese share of imports and exports to the world. Part 2 also looks at the types of merchandise traded worldwide. Finally, part 3 quantifies the dynamic trade linkages between the United States and the rest of the world, comparing them with China's global trade.
China's growth as a trade partner
For nearly two decades, China has been on the list of top 10 U.S. trading partners. As chart 1 shows, China's shares of U.S. imports and exports have both more than doubled since the late nineties. For example, products and commodities imported from China rose from approximately 8 percent of U.S. goods imports in 1999 to 20 percent in 2014. Similarly, U.S. exports to China grew from about 2 percent in 1999 to 8 percent in 2014. Approximately 1 percent of U.S. imports from China were re-exported  during 1999 - 2014. This article considers the face value of imports and exports, without taking into consideration the goods re-exported and re-imported.
Cheap supply of labor has long been China's major competitive advantage in global trade. Over the years, China has tended to import capital-intensive goods and raw materials from the United States and ship back a diversified basket of finished goods.
Chart 2 shows the percentage of Chinese commodities imported from and exported to the United States in 2014 (broken down in the two-digit Harmonized System, or HS-2). Note that China's exports of electrical equipment and machines (mainly computers and telephones) are very different from the electrical equipment and machines that China imports (mainly electronic integrated circuits and turbojets, turbopropellers, and other gas turbines).
Furthermore, it is also important to gauge the trade linkage with China and the United States' major trading partners to better understand U.S. exporters' indirect exposure to China. Chart 3 ranks the top 10 major U.S. export markets in 1999 and 2014 by their percentage of total U.S. exports each year. Chart 4 shows the top 10 trading partners as measured by their share of total U.S. imports in 1999 and 2014.
Chart 5 shows the percentage of total exports going to China for each major U.S. trading partner, and chart 6 shows the percentage of imports coming from China. Both the share of total exports and the share of imports have risen significantly over the past decades.
Due to the strong geographic and political ties between China and Hong Kong, it's not surprising that in 2014, 53.9 percent of Hong Kong's total exports went to China and 47.8 percent of Hong Kong's total imports came from China. Although China's trade reliance on Japan has fallen over the decades, Japan still depends on China's trade - approximately one-fifth of both imports and exports were exchanged with China last year. Similarly, about one-fourth of South Korea's (also known as the Republic of Korea) international trade is with China.
Canada and Mexico are the second and third largest trading partners with the United States and are its top two export markets. Canada's trade with China has risen over the years, but it is just a small proportion of its overall trade: in 2014, imports were 11.5 percent and exports were only 3.7 percent. Mexico's exporters are even less dependent on China - the country's exports to China account for not even 2 percent of its total exports. By contrast, Mexico's imports from China increased from 0.3 percent in 1980 to 16.6 percent in 2014.
From the perspective of China
Since 2000, the United States has been among China's top five trading partners. Over the past 15 years, the United States' share in China's trade has diminished slightly. In 2014, the United States accounted for 8 percent of its total imports. That year's China exports to the United States represented 17 percent of China's total exports.
Chart 7 shows China's exports to the United States' top 10 export markets. In 2000, these countries represented 50 percent of China's total exports; this figure dropped to 38.6 percent by 2014, as China diversified its export markets (according to the World Bank, the Hirschman Herfindahl index,  which measures the dispersion of trade value across an exporter's partners, was 0.08 in 2014.)
Chart 8 shows China's imports from the United States' top 10 trading partners. Imports from Canada, France, South Korea and the United Kingdom as a share of China's total imports gradually diminished over the years to be 1.3 percent, 1.4 percent, 9.7 percent, and 1.2 percent, respectively, in 2014. The share of imports from Japan also fell. Meanwhile, the share of China's imports from Germany, India, and Mexico sharply increased from 2000 to 2014. Overall, these 10 countries represented 40 percent of Chinese total imports in 2000, which declined to 31 percent by 2014.
With China's economic development has come a change in the types of products consumed by its citizens. Tables 1 and 2 show the two main HS-4 commodities traded between China and the U.S. major trading partners listed in charts 5 and 6.
Table 1 shows the major products and commodities imported by China from several selected countries along with their percentage of China's total imports by country and year. For example, in 2014, approximately 76 percent of China's imports from Saudi Arabia was oil.
Table 1: China's Top Two Imports from U.S. Major Trade Partners (2000 and 2014)
Source: United Nations Comtrade
Similarly, Table 2 shows the major products and commodities exported by China to several selected countries along with their percentage of China's total exports by country and year. For example, in 2014 approximately 7 percent of China's exports to Canada were computers and 6 percent were electric machinery.
Table 2. China's Two Major Exports to U.S. Major Trade Partners (2000 and 2014)
Source: United Nations Comtrade
According to these tables, China's exports to the major U.S. trading partners are mainly machines and electrical equipment, while it imports natural resources and machinery. The types of commodities traded between China and the United States' top trading partners have changed since 2000, when China imported primarily food and exported office equipment and clothes.
The economic importance of China
China is a major U.S. trading partner. China is by far the United States' largest source of imported goods as well as an increasingly important destination for U.S.-made products. The United States's other large trading partners have over the years also become more and more reliant on China's economy.
For this reason, a slowdown in China's economic activity could strongly affect international trade and deliver a negative shock to the United States. Clearly, trade is not the only channel through which China's slowdown could hold back economic growth in the United States. A number of other dynamic mechanisms (including financial market volatility, consumer and business confidence, and exchange rates) might affect U.S. growth.
Part 2 will look at international trade from China's perspective, exploring the relative importance of U.S. major trading partners to China. It will rank them by their share in China's total imports and exports and include a more detailed description of types of goods imported and exported worldwide.
Part 3 will quantify the amount of exports and imports from and to other countries that have been absorbed by China and the United States over the decades. The goal is to compare the trade linkage between the world and the United States with the linkage between the world and China.
About the Author
Giulia Zilio is a research assistant in the Research Department at the Federal Reserve Bank of Atlanta and PhD candidate at Georgia State University
 Re-exports are exports of foreign goods in the same state as previously imported without being transformed or modified. A large percentage of U.S. imports from Hong Kong have been re-exported back to Hong Kong. China does not re-exports goods to the United States. However, it does re-import a large amount of goods from Hong Kong. This is not surprising since Hong Kong has a relaxed trade relationship with China while being open to international trade. In other words, Hong Kong represents China's "middleman" in trading goods and controlling foreign direct investments.
 A country with trade (export or import) that is concentrated in very few markets will have an index value close to one. Similarly, a country with a perfectly diversified trade portfolio will have an index close to zero.
 27.9 percent of China's imports from Hong Kong in 2014 were commodities not specified.
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